Saturday, October 31, 2015

How the Fed Is increasing economic inequality

Rand Paul Is Right: The Fed Is Increasing Inequality With Its Low Rates - Forbes - Jeffrey Dorfman: 

October 29, 2015 - "Last night’s Republican debate was supposed to be about economic policy, but instead it was, once again, more about moderators asking gotcha questions.... There was, however, a great moment of economic clarity, thanks to Rand Paul, on the surprisingly overlooked role the Fed has played in increasing economic inequality.

"Virtually all economists agree that the Fed’s low interest rates have been responsible for inflating stock market values. By reducing the returns to savings accounts, certificates of deposit and bonds, the Fed has intentionally driven ordinary investors to increase their investment allocation to the stock market, thereby boosting stock returns. Because people with more wealth tend to own more stock, those higher stock prices have led the rich to gain much more than the poor and middle class.

"Low interest rates have meant low borrowing costs for large corporations with direct access to capital markets. This low-cost borrowing has boosted corporate profits which also flow mostly to the wealthy.

"Poorer individuals, with smaller savings and few other assets, tend to be heavier users of credit cards for borrowing.... Unfortunately, while the Fed has pushed down interest rates for big corporations, average credit card interest rates have only dropped about 1.5 percentage points (from about 14.5 to 13%).... Wealthier individuals, with more savings and other assets, rarely need to carry a credit card balance, but they do borrow (tax-deductible) funds in the form of mortgage debt, often in large amounts. Thanks partly to the Fed’s many moves to lower interest rates, mortgage rates have fallen about 2.5 percentage points (roughly from 6.5 to 4% for 30 year fixed rate mortgages).... For example, somebody with a $400,000 mortgage could save ... $600 to $800 per month, way more than the $20 per month the poor are saving on credit card debt.

"Finally, the low interest rates set by the Fed combined with the additional labor costs thanks to the Obama Administration (Obamacare and its associated taxes) are changing the relative prices of labor and capital.... This also increases economic inequality because the poor and middle class earn most (or all) of their money from labor income, while the rich collect a significant share of their income in various forms of returns to capital.... Purposely tilting the economy in favor of capital and against labor is pretty close to taking from the poor and giving to the rich, the exact reverse of normal government attempts to redistribute income.

"[While] the left is consumed with economic inequality, nary a voice on the left is complaining about the Fed’s role in making it worse. Rand Paul is correct that the Fed is causing a widening of economic inequality....If you want less economic inequality, we should begin by stopping policies that make it worse."

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